Housing Market Tracker - Subprime Review

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Includes: FMCC, FNMA, GFG-OLD, MER, MTG, NCC, PMIR, STT
by: Judy Weil

Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. Like all other topics and stock coverage from Seeking Alpha, you can have this sent to your Blackberry or desktop email by signing up for our no-spam free email subscription service.

Quote of the Day

"Anytime you need to go a bank it's a problem right now. Banks are going to extract some flesh. They have to.'' - Jonathan Rather, general partner and CFO of Welsh, Carson in New York, about the higher interest on debt that banks are demanding now, particularly from highly leveraged companies that desperately need to restructure debt. (Bloomberg, Jan. 3rd)

Subprime Fallout

  • Regional Bank in Ohio to Trim 900 Jobs (NY Times, Jan. 3rd): "Regional bank National City Corporation (NCC) said on Wednesday that it was cutting its dividend by nearly half and shutting its wholesale mortgage division, eliminating 900 jobs, because of weakened housing and credit markets... National City said... it planned to raise new capital in Q1 and had hired Goldman Sachs as an adviser. The job cuts... bring to 3,400 the number of jobs eliminated in recent months as National City restricted mortgage originations to focus on prime borrowers with solid credit histories... NCC has been hit hard because of rising delinquencies and defaults in mortgages and a severely declining housing market."

  • Jingle Mail, in Practice (Felix Salmon in Seeking Alpha, Jan. 3rd): "I live in an $800,000 house I bought with no money down. I can buy an identical house across the street for $500,000. My credit's great, since I've never missed a mortgage payment. But as soon as I buy the house across the street, I have every intention of never making a mortgage payment on my present place again. Since my mortgage is de facto non-recourse, and since I don't need to pay taxes on forgiven debt, the cost of default is basically zero, while the benefit of default is $300,000 in lower total indebtedness... Everything in this scenario is a prime loan... Negative equity + Non-recourse debt = Very nasty price dynamics and mortgage losses."

  • Leveraged Loans Lose $28 Billion While Carlyle Gets Punished (Bloomberg, Jan. 3rd): "S&P: Creditors are making borrowers from Carlyle Group's LifeCare Holdings to casino-owner Tropicana Entertainment LLC increase the interest on their debt by an average 0.83 percentage point to change the terms of their loans, the highest price since 1997. The penalties are four times higher than six months ago, S&P said. Moody's: A total of 179 North American companies have a high risk of default or may need to change details of their debt agreements. Lenders are taking advantage of the distress to recoup losses after the collapse of the subprime mortgage market caused $551 billion of so-called leveraged loans... to fall below 95 cents on the dollar, from $1.00 before June."

  • Thursday's Under The Radar News (Eli Hoffmann in Seeking Alpha, Jan. 3rd): "Countrywide (CFC) is cutting 127 jobs in Illinois. The company is under investigation by the Illinois AG for predatory and possibly fraudulent lending practices."

  • State Street Takes $279M Pretax Charge (Yahoo! Finance, Jan. 3rd): "State Street Corp. (NYSE:STT) on Thursday set aside $618 million to cover expected legal fallout from soured investments tied to subprime mortgages [but] raised earnings expectations... William Hunt, who headed the State Street Global Advisors investment unit, resigned and was replaced on an interim basis by Executive VP James Phalen. The set-aside for legal expenses and other costs from fixed-income investments totals $618M on a pretax basis. But the charge is expected to shave just $279M, or $0.71/share, from fourth-quarter earnings taking into account the reserve's tax effects, and a resulting decline in costs from incentive compensation to employees."

  • CNBC Reports Merrill Lynch May Cut Up to 1,600 Jobs (Street Insider, Jan. 2nd): "CNBC Charlie Gasparino is reporting today that Merrill Lynch (MER) may cut about 1,600 jobs as soon as Thursday. Gasparino said the credit/bond desk is at the most risk. Recently, Merrill Lynch raised $6.2 billion of newly issued common stock in a private placement with Temasek Holdings and Davis Selected Advisors to shore-up the balance sheet due to its exposure to the subprime debacle. It has also been reported that Merrill Lynch's new CEO, John Thain, is out shopping for more capital [reportedly with Chinese and Middle Eastern sovereign funds – Ed.]

  • In the Land of Many Ifs (NY Times, Jan. 2nd): "Though default rates on loans to homeowners with relatively good credit are far lower, they are rising sharply, too. In November, 6.6% of so-called Alt-A home loans — those deemed somewhat less risky than subprime — were either delinquent by 60 days or more, in foreclosure, or had been repossessed. That was up from 4.3% in August. This is a potentially ominous sign, because subprime and Alt-A mortgages issued in 2006 together made up about 40% of all mortgages. Like many of the subprime loans that have landed in trouble, Alt-A loans often begin with a low introductory interest rate that later escalates."

  • Fixes Made In 2007 Not Enough To Halt Foreclosures (Boston Globe, Jan. 2nd): "In 2008, state and federal officials must decide how to regulate subprime loans. The industry is gone for the moment. Lenders sold about $26.3 billion of subprime loans in Q3'07, down more than 80% from the roughly $139B sold at the peak of the boom in Q4'05, according to Standard & Poor's. But its recovery in some form is widely considered inevitable."

  • Some Funds Wend Way Through Subprime Mess (Telegram.com, Jan. 1st): "The $532 million Franklin Real Estate Securities, run by Alex Peters of Franklin Resources Inc., was the biggest loser among property funds, falling 26%. The worst performing financial fund was the $148M Fidelity Select Home Finance, overseen by Dick Manuel, with a 38% drop... The worst-performing bond fund was the $190 million Regions Morgan Keegan Select High Income, which plunged 59% because of losses tied to subprime mortgages."

  • Mortgage-Insurer Defaults Hit Record (BusinessWeek, Dec. 31st): "Mortgage insurance companies such as PMI Group Inc. (PMI) and MGIC Investment Corp. (NYSE:MTG) protect lenders from defaults on home loans, but have posted hefty losses this year and seen their shares plummet as more homeowners were unable to pay their monthly loans. Defaults, defined as loans 60 or more days late, rose in November to more than 61,000 industrywide, up 35% from November 2006, according to the Mortgage Insurance Companies of America. It was the highest monthly number since May 1999, when the trade group started tracking the data."

  • Maybe a Way to Jumpstart Housing (Motley Fool, Dec. 31st): "The healing in the housing market almost has to begin at the upper end and then filter down to the world of first-time buyers. As such, I'm at a loss to understand why the ceiling for conforming loans that can be bought by Fannie Mae (FNM) and Freddie Mac (FRE) has been stalled at $417,000 for a single family home for three years. A hike in that ceiling -- to perhaps just above $500,000 -- likely would help to initiate that healing at the upper end, as interest rates on conforming loans are more attractive to homebuyers compared to jumbo loans."

  • Newly Spun-Off Guaranty Financial Rises 10% (Dallas Morning News, Dec. 31st): "Guaranty Financial Group Inc. shares rose more than 10% Monday in their first day of regular trading on the NYSE... after the financial services company was spun off from parent Temple-Inland Inc. Guaranty, with $16 billion in assets, is the holding company of Guaranty Bank... December SEC filing: Last year... Temple-Inland's Guaranty unit's nonperforming assets reached $130 million as of Sept. 30, [vs.] $30M a year before. Guaranty set aside $17M as credit loss provisions during the first nine months of 2007, compared with $1M in the same period of 2006. Guaranty does not originate or purchase subprime loans. But [has] about 56% of its lending portfolio in residential real estate."

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